Oklahoma oil producers have seen prices tumble 12 percent this summer.
Oil is a worldwide commodity largely influenced by global supply distributions and demand patterns, especially in key areas like the Middle East. But the rapid increase in domestic oil production in recent years has led domestic prices to trend below the international Brent crude benchmark.
West Texas Intermediate crude, priced in Cushing, is seen as the benchmark for domestic crude. The WTI price closed at $93.88 Tuesday, up 2 cents on the day, but down from $105.18 on July 1. Brent closed at $102.58 Tuesday.
While WTI is a benchmark, it’s often not the price Oklahoma producers receive for their oil. Crude oils typically draw different sales prices based on viscosity (light or heavy) and sulfur content (sweet or sour.)
Historically, light, sweet crude has been in strongest demand and commanded the highest price. But refineries each require a specific blend of oils. As production has increased of light, sweet, domestic crude, local prices have swung based on refinery demand.
Oklahoma Sweet crude, which represents most oil production in the state, settled at $89.75 Monday, down nearly 12 percent from $101.75 on July 1.
Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Conn., said market fundamentals did not appear to justify the rapid price spike early in the summer and that prices likely have fallen too much in recent weeks.
“Domestic crudes surged above $100 a barrel early this summer on fears of supply disruptions in Ukraine, Iraq and Syria,” McGillian told The Oklahoman on Tuesday. “Since then, the market has lopped off more than 10 percent. I think we have completely eliminated the geopolitical risk that was priced into crude, but we haven’t seen resolution of any of the issues that created that risk.”
If tensions continue in those parts of the world, prices could increase again, McGillian said. But the price is not solely dependent on supply.
“If we start to see economic improvements in Europe, I think it will start to put a floor under the price and make a rebound,” he said.
While global supply and demand issues have more of a psychological effect on domestic prices, local issues have much more influence, McGillian said.
“Domestically, I still think that production levels are going to create quite a headwind on prices,” he said. “We are seeing signs that there is economic improvement.”
The country’s refineries have been operating at 92 to 94 percent capacity in recent months. The high usage rate and the addition of new pipelines to deliver crude from Cushing to Houston have combined to drive down storage levels at the Oklahoma hub, which also has helped hold down local oil prices.
Refineries in the next few weeks will begin seasonal maintenance to prepare for producing winter gasoline mixes.
“When that happens, demand will fall off, causing stocks to build back up,” McGillian said. “The real question is whether we have enough demand for exports to keep the refineries running at this pace. We will find that out as we get into the last quarter of the year.”
Crude exports needed
Oklahoma Independent Petroleum Association President Mike Terry said he sees the discounted WTI price as evidence the country needs to allow crude oil exports. Current policy allows exports of refined products like gasoline and diesel, but not of crude oil.
“The loser in decreased American oil prices are U.S. consumers, who have seen little benefit at the pump because gasoline prices are set on Brent Crude, the worldwide oil price,” Terry said Tuesday. “With no man-made transportation obstacles like those that block exports on U.S. crude oil, gasoline refined from cheaper American oil is shipped overseas.”